ConocoPhillips (COP) is the largest independent oil and gas producer in the U.S. As such, it was hit especially hard by the downturn in the energy market.

The company lost billions of dollars in 2015 and 2016, which forced the company to slash its dividend by two-thirds in February last year.

ConocoPhillips had not cut its dividend for the previous 25 years. Prior to the cut, it was a Dividend Achiever, a group of 272 stocks with 10+ years of consecutive dividend increases.

Since the cut, the company has slowly worked its way back. Its loss narrowed in 2016, which allowed the company to recently raise its dividend by 6%.

To be sure, ConocoPhillips’ dividend is nowhere close to its pre-cut level. But the company is steadily making progress in its turnaround.

Business Overview

It is no secret that the past few years have been brutal for the oil and gas industry. This is particularly true for the so-called “upstream” firms.

Upstream refers to companies that explore for, and produce, oil and gas. These companies are highly reliant on the underlying commodity price.

By contrast, midstream pipeline operators and downstream oil refiners do not rely nearly as much on a high commodity price for profitability.

From 2014-2016, the price of oil in the U.S. dropped by more than 70% from peak-to-trough.

This compelled ConocoPhillips to take a much stricter view of its capital spending and allocation priorities.

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Source: 2016 Earnings Presentation, page 4

The company placed additional focus on efficiency, strengthening the balance sheet, and returning the company to growth in a low-oil price environment.

ConocoPhillips recently announced earnings results for the fourth quarter and 2016. Not surprisingly, the results were poor.

The company lost $3.6 billion in 2016, a modest improvement from the $4.4 billion loss incurred in 2015. Production increased 3% for the year, to 1.56 million barrels of oil equivalents per day.

One bit of good news is that, thanks to ConocoPhillips’ renewed emphasis on capital discipline, the losses are declining. ConocoPhillips took swift action over the past year to cut costs and sell off assets deemed non-critical for the future.

For example, ConocoPhillips cut capital expenditures by more than 50% in 2016, to $4.9 billion. In addition, the company reduced production and operating expenses by 19% during the year.

Lastly, ConocoPhillips realized $1.3 billion in net proceeds from asset sales.

This, in addition with stabilizing oil prices, helped ConocoPhillips meaningfully reduce its losses as the year progressed. ConocoPhillips lost $35 million in the fourth quarter, compared with a loss of $3.5 billion in the same quarter last year.

And, the company’s actions have helped it lower its break-even point by 60% from 2014-2016.

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Source: Goldman Sachs Energy Conference, page 12

This means ConocoPhillips will breakeven in 2017 at a Brent price of $50 per barrel. A lower breakeven point will help ConocoPhillips return to profitability and growth in 2017, especially since Brent crude currently trades around $55 per barrel.

Growth Prospects

The biggest growth catalyst for ConocoPhillips is a higher oil price.

ConocoPhillips is highly sensitive to fluctuations in the price of oil. For example, its profit rises or falls $100-$120 million for every $1 change in Brent crude, and $30-$40 million for every $1 change in WTI crude.

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Source: 2016 Earnings Presentation, page 18

Aside from higher oil prices, new projects are a separate growth catalyst for ConocoPhillips. Over the course of 2016, ConocoPhillips ramped up production at several new project developments.

Major project startups include the APLNG Train 2 in Australia, and the Foster Creek Phase G and Christina Lake Phase F projects in Canada

ConocoPhillips has a major operational competitive advantage, which are its high-quality assets. The company has huge operations in some of the premier oil and gas producing fields in the U.S., including the Permian Basin, Eagle Ford, and Bakken regions.

In addition, ConocoPhillips has a large presence in Canada, another major oil-producing region.

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Source: 2016 Earnings Presentation, page 11

ConocoPhillips expanded its active rigs in the Eagle Ford and Bakken regions in 2016. It had 8 rigs in operation in the lower 48 U.S. states at the end of 2016, with plans to increase that to 11 rigs in 2017.

Furthermore, production in Canada increased 17% in the fourth quarter, thanks largely to record production in the Canadian oil sands.

Continued growth in production will help ConocoPhillips’ bottom line in two ways. First, production growth will provide additional cash flow. Second, completion of major projects in these areas will allow them to transition from a use of cash to a source of cash.

This could help improve ConocoPhillips’ cash flow in 2017, which would allow for another dividend increase this year.

Dividend Analysis

ConocoPhillips maintains a divided policy, in which it aims to return 20%-30% of annual operating cash flow. This serves as a baseline for the likelihood of future dividend increases.

In 2016, the company generated $4.9 billion in cash from operations, excluding a $500 million non-recurring change in working capital.

Based on the company’s 1.25 billion shares outstanding, this works out to approximately $0.78-$1.17 per share available for dividends in 2017.

After the 6% increase, ConocoPhillips’ forward annualized dividend will rise to $1.06 per share, which is right in the middle of its target range.

For 2017, ConocoPhillips expects production to be flat to up 2% from 2016. Capital expenditures are expected to rise at a similar rate.

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Source: 2016 Earnings Presentation, page 14

Assuming flat commodity prices, this means 2017 operating cash flow is likely to be near 2016 levels. This would leave room for another 6%-8% dividend increase in 2017. Significantly higher oil prices could allow for a double-digit increase.

Final Thoughts

ConocoPhillips suffered a disastrous decline over the past two years. But it is on the mend, and made meaningful progress in 2016.

Thanks to a streamlined cost structure, and efficient capital deployment, the company seems to have stabilized. Greater efficiency, combined with a higher oil price, could help ConocoPhillips return to profitability in 2017.

It may take several more years for ConocoPhillips’ dividend to surpass its pre-cut level. But ConocoPhillips is one of the best stocks to buy for investors anticipating higher oil prices down the road.